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Basel Iv Compliance REPRINT risk & R&Ccompliance DATA PRIVACY INBASEL EUROPE IV COMPLIANCE REPRINTED FROM: RISK & COMPLIANCE MAGAZINE JAN-MARJAN-MAR 20202014 ISSUE rriskisk && && compliance compliance������������ JAN-MAR 2014 RC ��������������������������������� RC www.riskandcompliancemagazine.com Inside this issue: FEATURE The evolving role of the chief risk officer EXPERT FORUM Managing your company’s regulatory exposure ������������������ HOT TOPIC ������� Data privacy in Europe ������������������������� ���������������������� ������������ ���������������������� �������������������� ��������� ������������������������� ����������������������������� www.riskandcompliancemagazine.com VVisitisit the website to request a free copy of the full e-magazine To learn more about how SAS can help drive business evolution with intelligent Published by Financier Worldwide Ltd [email protected]@financierworldwide.com risk analytics, please visit sas.com/risk. © 20202014 Financier Worldwide Ltd. All rights reserved. risk & R&Ccompliance www.riskandcompliancemagazine.com 2 RISK & COMPLIANCE Jan-Mar 2020 www.riskandcompliancemagazine.com MINI-ROUNDTABLE MINI-ROUNDTABLE BASEL IV COMPLIANCE www.riskandcompliancemagazine.com RISK & COMPLIANCE Jan-Mar 2020 3 BASEL IV COMPLIANCE MINI-ROUNDTABLE PANEL EXPERTS Luís Barbosa Partner PwC T: +351 213 599 151 E: luis.fi[email protected] Luís Barbosa is currently leading PwC’s European network in the area of risk modelling & risk-weighted assets (RWA) and is responsible for the credit risk internal models Basel IV European initiative. He joined PwC’s financial services risk & regulation advisory department (Lisbon office) in 2015, where he has been engaged in several international PwC projects related to risk management and measurement at financial institutions, with a clear focus on strategic and regulatory affairs. Luís Jesus RQS Advisory Industry Consultant SAS T: +351 210 316 084 E: [email protected] Luís Jesus is currently a consultant and the solution lead for the regulatory risk solution in the risk and quantitative solutions division at SAS, where he has been involved in several projects around the world for the implementation of the new Basel IV capital requirements. Before joining SAS, he was chief risk officer (CRO) at Banco Montepio from 2015 to 2018 and an associated partner at KPMG until 2015, as the head of the risk advisory function for banking in Portugal and Angola. 4 RISK & COMPLIANCE Jan-Mar 2020 www.riskandcompliancemagazine.com BASEL IV COMPLIANCE MINI-ROUNDTABLE R&C: Could you explain the global capacity to adopt the referred changes, at least from reach of Basel IV? In which regions is its the regulatory side. implementation more advanced? Jesus: After the financial crisis, the new Basel III Barbosa: Basel IV, or the completion of Basel regulatory framework was developed by the Basel III implementation, brings a substantial revision of Committee to address the regulatory weaknesses the global regulatory framework, seeks to restore that were identified and was intended to improve credibility in the calculation of risk weighted assets the resilience of individual banks and of the financial (RWA) and improves the comparability of banks’ system, and therefore to reduce the risk of taxpayers solvency ratios. It will fundamentally change the having to bear the cost of future banking crises. The calculation of RWA across the different risk types latest set of these reforms are collectively called – credit, market, operational, counterparty credit risk Basel IV. Although this framework is a global guidance (CCR) and credit valuation adjustment (CVA) risks. targeting all internationally active banks around This will be driven either by standardised or internal the world, the implementation approach for these model approaches, including the rules of a wide set reforms will be based on the strategy defined by each of relevant topics for the banking business, such as country by their supervisory authorities. We believe large exposures, securitisations, leverage, output that Europe and Asia-Pacific will be the regions taking floor, step-in risk, interest rate risk in the banking the lead on the implementation of Basel IV. In this book (IRRBB), the treatment of investment funds or regard, it is relevant to highlight the adoption, in April underlying disclosure requirements. Regarding the 2019, of a set of legislative measures referred to as implementation of Basel IV across the globe, there ‘CRR II’ by the European parliament. Additionally, the are several different realities. In Europe, namely within Australian Prudential Regulation Authority (APRA) the European Union (EU), the process of translating has already issued a first set of reforms to implement the Basel guidance into effective law is typically slow, Basel IV, which will probably be concluded next year. taking up to one year, and requires a great deal of The Basel Committee monitors the adoption status discussion until a final agreement is reached at the of Basel standards around the world, with other European parliament. Countries such as Australia, countries defining dates for issuing local regulation for Canada, Singapore and Hong Kong appear to be at a the implementation of Basel IV. more advanced stage, showing greater flexibility and www.riskandcompliancemagazine.com RISK & COMPLIANCE Jan-Mar 2020 5 BASEL IV COMPLIANCE MINI-ROUNDTABLE R&C: In your opinion, how well are banks be finalised well in advance of the implementation prepared for Basel IV? Where are they date. focusing their implementation efforts? Jesus: The implementation of the Basel IV Barbosa: Many banks are still preparing for Basel regulatory requirements represents a significant IV and there are many significant challenges still challenge for most financial institutions, mainly due to to be faced. Primarily, business models and risk the broad scope of the changes that cover different strategies must be adjusted in anticipation of the new rules. For instance, strategies regarding changing the mix of portfolios or investment strategies, avoiding a “Primarily, business models and significant increase in RWA or taking risk strategies must be adjusted in advantage of any opportunity for RWA reduction should be considered. Capital anticipation of the new rules.” optimisation programmes are clearly back on the agenda of many boards. Looking to the surrounding processes, not only have the revised RWA calculation approaches Luís Barbosa, PwC become more complex to implement – even the standardised ones – but also the links established with the business require a risk types, such as credit, market and operational set of structural adjustments. Data requirements risk, and that require changes to current approaches and respective data quality also play an important used to calculate capital requirements. This can also role in ensuring that all optimisation opportunities have a relevant impact on business models due can be effectively used for RWA reduction. Overall, to impacts on specific lines of business. Therefore, banks are still fine-tuning their impact estimations the implementation of these changes requires the and on the market risk side, continuing and finishing significant allocation of resources, technical and their fundamental review of the trading book (FRTB) human, to ensure their adoption across their risk assessment and implementation processes. There is management and business processes. There are a lot still to be done, at all levels. And everything must different levels of preparation for Basel IV. Most banks have already performed an internal gap 6 RISK & COMPLIANCE Jan-Mar 2020 www.riskandcompliancemagazine.com BASEL IV COMPLIANCE MINI-ROUNDTABLE analysis on these changes and are at an initial stage removed. Regarding the market risk framework, the of their implementation projects. Bigger banks, and FRTB implies revising, potentially in a noteworthy those banks that have participated in the Basel IV manner, the banking book boundary and introduces quantitative impact studies (QIS), have been more a new, more risk sensitive, though complex and data exposed to these changes and are therefore more intensive SA. The use of internal models implies advanced in these implementation projects. However, necessarily replacing the value at risk (VaR) by the given the increased regulatory scrutiny, most banks expected shortfall. Much more can be listed here or will have to provide a detailed and granular view is to happen in the remaining risk types. Calculation of these impacts on their balance sheets and their engines do need to be adapted to this new package business, which, in most cases, is still not possible at of rules, ensure proper performance levels, speed this stage. and consistency, be transparent and allow for greater agility, such as for simulation purposes, and R&C: To what extent do the new incorporate required adjustments. standards under Basel IV require changes to calculation engines and to banks’ Jesus: If we consider credit risk, as an example, internal processes? there are significant changes arising from the restrictions on the use of internal models for Barbosa: The proposed changes are structural and some asset classes and the introduction of more inevitable. For instance, the credit risk standardised risk-sensitive methods under the SA, as well as approach (SA) RWA calculation rules were altered the introduction of flooring the results of the IRB significantly, with new risk factors being considered, a capital requirements through
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